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What a Proper Economy Looks Like

South Korea has a lot going for it...

WITH MOST of the world's major economies running the printing presses to the point where it's becoming absurd, there's one country out there that is in the catbird seat when it comes to a strong, stable economy, growing export markets and strong stable companies, writes Martin Hutchinson for Money Morning.

And it's only going to get better.

Yes, there's a world of opportunity out there, but for all the good there are some serious risks in the usual investing suspects.

The US stock market is busting out to new highs, but the US economy remains below par and the federal budget deficit remains at staggeringly high levels.

In Japan, the government is doubling down on US policies, with a budget deficit and monetary "stimulus" twice the size of the US figures.

Britain and the EU are locked in recession, with "austerity" apparently not working and close to being abandoned, while monetary policy becomes looser and looser, with interest rates well below inflation.

The opportunity?

There is one country that runs a budget surplus, has interest rates above the level of inflation, and also has decent growth and a trade surplus.

But it's not one of the BRICs (the big emerging economies we hear so much about: Brazil, Russia, India and China).

Russia has oil, but a kleptocrat political system and inflation of 7% and rising.

China has growth but is another political system you wouldn't want to live under, and a mountain of bad debt in its banks, which contains the real budget deficit, much larger than the official one.

India also has a mushrooming budget deficit.

Brazil is in many ways the worst of the lot, with growth slowing and a budget deficit that is way higher than the official figure because of all the financing hidden in state banks.

There are smaller emerging markets with decent figures, but the country I want to tell you about is a rich country with a large stock market.

It is in the epicenter of the world's most dynamic growth and its balance sheet is stunning in a time of broad global malaise.

The country that's got its economy firing on all cylinders is South Korea.

Along with everything else it has going for it, South Korea just elected a center-right president, Park Geun-hye, who should be in office till 2017 and has a solid majority in Korea's congress.

But more compelling, South Korea isn't benefiting from artificial fiscal stimulus – it runs a budget surplus.

Its short term interest rate is 2.75%, inflation is 1.3%, and it has a thumping current account surplus of 4.5% of GDP.

And it's expected to grow at 2.9% in 2013 and 3.8% in 2014, which may not sound like much but is the fastest of any rich country.

South Korea is a technological leader, especially in the areas of display systems (portable computers that can be rolled up like a newspaper!) and stem cell biotech innovation.

In genetic engineering its lead may become more strategic in nature, since Korean public policy does not place the limitations on biotech innovation that the United States does.

But what's new is that South Korea is now also a cultural leader, with its "Gangnam Style" pop phenomenon sweeping the world. That's small potatoes in terms of immediate revenues, but allows Korea to attract the young, style-conscious and footloose (among whom are many of the world's innovators) in a way it could never have done 20 years ago.

The Korean market is valued at a moderate 16 times earnings, according to the Financial Times, compared with 17 times earnings in the slower-growing US

However since Korea has not pursued the funny money or funny-budget policies of other countries, it's much less likely to get in trouble. While North Korea is obviously a worry, overall South Korea is an excellent safe haven from the nasties that affect the rest of the world.

Now a contributing editor to both the Money Map Report and Money Morning, the much-respected free daily advisory service, Martin Hutchinson is an investment banker with more than 25 years’ experience. A graduate of Cambridge and Harvard universities, he moved from working on Wall Street and in the City, as well as in Spain and South Korea, to helping the governments of Bulgaria, Croatia and Macedonia establish their Treasury bond markets in the late '90s. Business and Economics Editor at United Press International from 2000-4, and a BreakingViews editor since 2006, Hutchinson is also author of the closely-followed Bear's Lair column at the Prudent Bear website.

See full archive of Martin Hutchinson.

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